Key factors that should be considered when investing
While we're all familiar with the notion of working hard to earn money, knowing how to make money work for us is quite a different proposition. With a wide variety of options available and lots of financial terminologies, it can feel overwhelming when deciding what to do with cash. Every investor's budgeting goal is to make some extra money in as secure a way as possible.
A well-calculated investment can potentially bring higher returns. However, investments come with several risks, one of them being inflation for long-term investments. Inflation is the rise in the price of things; it decreases the value of money over time. As such, it's essential to make an investment that retains or increases the value of money. According to Jeff Sica, the founder of Circle Squared Alternative Investments, there's always a better way to build wealth. Sica has worked with the biggest names in the financial services industry and has propelled more than $1bn worth of transactions in technology startups, private equity, award-winning movies, Broadway shows, and an array of real estate projects.
Before you invest, consider the following factors that will help you determine where, when, and how you should invest:
1. Composition of expected returns
Most investments offer returns either through capital gains or income yield – and sometimes both. With income yield, you can receive that money along the way. The money is taxable, and you can plan around your income accordingly. On the other hand, capital gains investment appreciates over time and offers the benefit of more favorable tax treatment. That is because the rate of capital gains tax is usually lower than the marginal income tax rate.
Another significant implication for returns is the payment for any holding costs connected to your investment. For instance, consider an investment property with expenses like repairs, council rates, and land tax. If the income generated from rent isn't sufficient to meet the holding costs, you'll need to add some funds to cover those costs. Over time, your asset does appreciate, and your capital gains will make up for it in the end.
2. Investment horizon and liquidity
This refers to how long you're willing to tie your money up and how long your investment could run. Money in the bank can be accessed quickly at any time when needed. Accessing cash from an investment property can take a long time, as you will need to sell it. Depending on the market, that could take months. Those in closed-end funds could even take longer (10-15 years). You can get some useful insights from a successful business model to help you balance the need for liquidity and desire for return.
In investments, unfortunately, you cannot be sure about anything. Some investments tend to be safer than others. For example, if you put your money in a term deposit, you're guaranteed a small positive return and that your money is secure. While banks will offer you certainty, your returns will be on the lower end of the spectrum. That is because of the strong correlation that exists between risk and return.
As you take on investments with higher expected returns, you'll be taking more risks. Investing in property offers higher expected returns over time. However, you're likely to face additional risks like a decline in your property's value, capital expenditure on the property, and failing to secure a tenant, among others.
Speculative investments like biotech or cryptocurrencies and venture capital are considered to be on the topmost part of the risk spectrum. You can make spectacular gains, but there's a risk of losing some or your entire investment.
Often, people are not aware of their exact needs. They're not sure if they need high-liquidity products or growth products. Some wish for growth without giving up extra monthly income. Diversifying into different styles of investments is a good way of balancing investment-related considerations. Well-diversified portfolios will help you buy securities for regular income as well as growth. While some securities may allow you to sell any time you need, some will be locked for a specified period. There will be a balance of investments with low and high risks, a majority of them being in between.
The whole point of investing is earning good returns; however, at times, it's undeniable that investments can lose their value. The principal considerations you make when planning for investment can reduce the risk that your investment portfolio may fail to perform according to your expectations. You must look at the types of investments available, the historical performance of several assets, and your financial situation. You can then select investments that combine characteristics that will help you deliver an ideal performance at a level of risk you can tolerate.